The Process of Foreclosure

The process of a foreclosure may differ from state to state, but the basics remain constant. Foreclosure can happen to any home-owner and typically no one benefits from it. It damages the credit of the home-owner and usually results in loss for the lender. If you are facing foreclosure, or you represent a lender foreclosing on a borrower, these steps should accurately reflect the process.

Step One:

Neglect to pay the loan payment. Most banks will not start foreclosure after just one missed payment. There tends to be a grace period before the proceedings begin. After the second missed payment, the bank will contact the borrower. At this point, the lender will usually accept both missed payments to rectify the situation. If the borrower is unable to pay, the situation will escalate.

Step Two:

Continue into foreclosure. At the third missed payment, the mortgage holder will proceed with a judicial sale or a power of sale. In a judicial sale, the mortgage lender files suit with the court system, and the borrower receives a letter demanding payment. Usually the court gives the borrower 30 days to respond with payment. If thirty days lapses without payment, then the lender can sell the property in an auction. A power of sale is less common, but operates without the court system. The mortgage lender demands payment from the borrower; if the payment is not received in the established time period, a deed of trust transfers the property to a trustee. The trustee then sells the house at a public auction. The home owner will be notified of all proceedings.

Step Three:

Sell the home. At auction, the opening bid is usually set at the sum of the outstanding loan balance, interest accrued, and legal fees associated with the foreclosure. If the opening bid is not met, the property is purchased back by the lender and deemed an REO or Real Estate Owned.

Step Four:

Leave the property. Once the property is sold, the sheriff’s office will serve an eviction notice. The borrower must vacate the home immediately. If the property was sold for an amount less than what was owed on the mortgage, there can be a deficiency judgment. The borrower will be required to pay the difference on the mortgage.


Warnings

A foreclosure should not be seen as an easy solution to a financial hardship. The foreclosure can leave a family homeless and can damage the family’s hopes of buying real estate in the future. Many employers are now requiring a good credit rating for employment, and in some cases, foreclosure can be grounds for termination.

A foreclosure can cost the local government thousands of dollars in trash removal, unpaid utilities, police costs, and inspections.

It is likely that the value of properties near the foreclosed home will decrease.